FRS 102 Section 1A - to disclose or not to disclose?

Tessa Park goes into detail about FRS 102 Section 1A’s disclosure requirements for small entities, including related party disclosures, going concern and additional statements

Three years after the effective date  for application of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland by small companies in 2016, the minimal disclosure regime introduced by company law, and reflected in Section 1A Small Entities (Appendices C and D), is causing a number of issues in practice. Accounts prepared under Section 1A must still give a true and fair view, so additional disclosures may be needed when the minimum disclosures are insufficient to meet this requirement.

Section 1A Appendix E also lists some disclosures which, when relevant, are encouraged. Entities need to exercise judgement in deciding which of these are necessary. Furthermore, for material transactions, events or conditions, small entities are encouraged to provide any of the disclosures as required by FRS 102 when being applied by entities not adopting the small entities regime.

Related party disclosures

The disclosures required by Section 1A are quite limited. Material transactions are required to be disclosed if they are not conducted under normal market conditions and are with:

1. owners holding a participating interest in the small entity;
2. companies in which the small entity itself has a participating interest; and
3. the small entity’s directors or members of its governing body.

Determining whether a transaction is under normal market conditions is sometimes straightforward, eg, the sale of an asset, such as a car, to a director where market values are readily available. However, this is much more difficult with transactions such as directors’ remuneration or dividends where market rates are not so easily established.

Transactions beyond those listed above also require consideration. Suppose a close family member of a director lends the entity £2m for three years at zero interest. Although the loan is clearly not at a market rate, transactions with close family members of directors are not related parties for the purposes of Section 1A so disclosure is not explicitly required. However, the Basis for Conclusions accompanying FRS 102 encourages small entities to consider whether disclosure about loans from other parties is necessary for the purposes of giving a true and fair view (paragraph B11.40).

Going concern

Disclosures relating to material uncertainties that cast doubt on the ability of the entity to continue as a going concern are encouraged for small entities in Appendix E but are not mandatory. However, it is unlikely the accounts will show a true and fair view if there are going concern issues and no disclosure is included. If the entity is audited, a lack of disclosure is likely to affect the audit opinion. Judgement will be required about exactly how much needs to be said, depending on the circumstances.

Additional statements

Section 1A encourages small entities to prepare statements of other comprehensive income and/or changes in equity when there are items of income or expense not recognised in profit or loss, or transactions with owners. Examples include a revaluation of property, a share repurchase or a transfer between components of equity. In these circumstances, presenting these statements is likely to be needed to ensure the accounts give a true and fair view.

Conclusion

Directors of small entities applying Section 1A, their accountants and, when relevant, their auditors need to ensure that they consider carefully what additional disclosures are needed, beyond the minimum required, for the accounts to show a true and fair view. They should review their assessment each reporting period, to ensure any changes in circumstances are taken into account. Judgement will be required and it is not enough to rely on accounting software alone.

About the author

Tessa Park is technical partner at Kingston Smith